Preparing Your Family for Their Inheritance


About the Author

jon bacon

true Jon Bacon, CFP®

Vice President
Torrance, California


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Family inheritance: it's one of those taboo dinner table topics, like sex, religion and politics, that we tend to avoid talking about in polite company. As a Certified Financial Planner™, however, one of my jobs is to help families break the ice and have these important conversations. In my experience the topic of inheritance might seem challenging or awkward at first, but with the right approach it can open the door to honest and fruitful communication with your loved ones.

The first step is just starting the conversation and framing a discussion about money in a positive and productive way.

Step 1: Know How to Talk Money With Your Family

I always tell my clients: Money is a tool. It’s not the ultimate goal in and of itself. Whether we’re talking about your life savings or a future inheritance coming down the pipeline, it’s helpful to look at money as a tool that can potentially help you accomplish your goals. To start the conversation, try asking some bigger picture questions that center around goals and values:

  • What kind of life are we going to build with this tool?
  • What can we do and not do with this tool?
  • What do we want to accomplish and why?
  • What are our priorities? Buying a house? Paying for a child’s education? Retiring early?

These family conversations about what money can be used for – such as travel plans or envisioning your ideal retirement - tend to be more pleasant and constructive than just crunching numbers, as they’re backed by shared values and history.

While understanding the tax impact of inheriting an IRA is important, it’s not the best place to start the discussion.

Step 2: Steer Clear of Family Conflict

There's the potential for conflict in every family, and money (especially a lot of it) can make people act funny. In every family, there are different dynamics and personal histories that cause people to feel they need a certain slice of the inheritance pie.

Some people are better than others at making or saving money. What do you do when one sibling is successful, and the other is not? Or the expenses may vary. Maybe the oldest son has three kids, and he's going to need more saved up than a bachelor making $300K a year — and that can be a sensitive topic.

The only way to get around hurt feelings is to be open and honest. Almost every parent I talk to wants to give evenly to their kids, and for the most part, they're able to - but how they make it happen can vary from child to child, depending on their needs and circumstances.

Maybe one kid needs help with college, while another needs a down payment for a house. One might get cash, one gets stock, one gets something put away for the future in a trust — there can be all sorts of arrangements. That’s where a financial advisor can help and do some of the heavy lifting by showing the family a variety of effective options based on their specific circumstances.

It's important to plant these seeds early and let the heirs think it over. Most family conflicts arise when people learn that they’re going to get a significant amount of money and think they have to figure out what to do with immediately. People can get scared, nervous, or defensive when they're under this type of pressure.

The more we're able to communicate, educate, and clarify wishes and goals of everybody over time, the higher probability you have of keeping everybody relatively happy.

Step 3: Apply Strategies for Balancing the Complexity of Inheritance

Breaking down inheritance conversations into manageable pieces is a strategy we use all the time. Often, folks try to solve the whole situation in their head on the fly. An advisor can help by simplifying things down to the basic components.

You can think of it this way: there are three options where the money will go: your kids, charity, or the government. You can mix those up in different amounts. Most people favor their kids, but some people favor charity. I haven’t met one yet that favored the government!

Sometimes well-intentioned charitable giving can be useful to not only build a long-term giving strategy, but to reduce tax burdens and help your other beneficiaries as well.

Step 4: Watch Out for Sudden Wealth Syndrome

As you plan your inheritance, here’s a sobering statistic: Approximately 70% of wealthy families lose their wealth by the next generation, with 90% losing it the generation after that.

Let that sink in a minute.

Why does this happen? We see it all the time. Suddenly, mom or dad dies, and heirs find themselves with more cash than they’ve ever had before. Do they know how to invest, how to make it last? Are they going to make the most rational decisions in their present emotional state?

To achieve a prosperous long-term outcome, preparation is key. Having wealth and enjoying life isn’t inherently problematic. The suddenness of it all is what throws people into a tailspin.

Money drops into your lap, and all of a sudden, you're able to change your lifestyle or experience life as you never have before. We counter the temptation to overspend with education, a goals based financial plan, and communication with the rest of the family.

When you get a large sum of money, it can be like having a compass without a map. Maybe you have a general direction you’d like to go, but you don’t want to take a costly wrong turn along the way. Having a financial plan in place can be the map helping you get where you want to go.

Being open, talking to advisors, and learning as much as possible about the game of building and maintaining wealth is the best way to avoid some of the profound intergenerational losses we often see.

Step 6: Invest in the Development of Your Financial Skill Sets

Preserving wealth is a much different skill set than building wealth.

In my experience, the people that have created lots of wealth in their life are generally risk-takers — those who are fearless, willing to make big swings and snap decisions. That's generally not the same skillset — the thoughtful, slower decision-making and consensus-building — that it takes to preserve wealth over many generations.

You’re not going to learn all this in a one-hour Zoom meeting with a financial advisor. Instead, it evolves out a lifetime pursuit of learning about money and investing:

  • Balancing risk and return
  • C Compound interest and investment time horizons
  • Diversification

Once you have money in the bank, many of these more abstract concepts start to feel much more real to you. That’s when you can start applying the principles that you’re learning.

Step 6: Consider Creating a Trust or Family Wealth Foundation


Lastly, I like to talk with my clients about their own family trusts. Often, they think of it as a very old-school, New York Rockefeller of Vanderbilt dynasty kind of thing — when in fact, trusts are a major part of modern-day estate planning and wealth management.

If your family wants to accomplish a specific set of goals — like supporting a university or a particular cause — a donor-advised fund or trust can be an efficient way to leave residual amounts to those organizations.

Trusts are a nimble and purposeful way to accomplish your estate planning goals that goes far beyond just saying, “I want to leave a big chunk of money for my heirs to determine how to dole out.”

Remember, you’re not just passing along your wealth. It's also important to pass along the values and the stories that went along with creating that wealth in the first place.

Maybe Grandpa invested in the railroads when he was in his thirties, worked really hard, and bought dividend-paying stocks that grew into a massive nest egg. Weaving these stories together is powerful for someone who’s inheriting a lot of wealth — to see themselves as part of a bigger picture within the family line.

Inheritance isn’t like winning the lottery jackpot: it’s about taking ownership over your piece of the larger family story and creating a continuing legacy for your kids or future heirs to build off as well. To start your journey, reach out to a Certified Financial Planner™ at EP Wealth today.





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